in re longfin corp. securities class action litigation 18-cv-02933...
TRANSCRIPT
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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IN RE LONGFIN CORP. SECURITIES CLASS
ACTION LITIGATION
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18cv2933(DLC)
OPINION AND
ORDER
Appearances:
For the plaintiffs:
Christopher James Kupka
Eduard Korsinsky
Levi & Korsinsky, LLP
55 Broadway, 10th Floor
New York, NY 10006
Donald J. Enright
Elizabeth K. Tripodi
John A. Carriel
Levi & Korsinsky LLP (DC)
1101 30th, Street, NW
Washington, DC 20007
For defendant Network 1:
Peter George Siachos
Jack I. Siegal
Gordon Rees Scully Mansukhani
18 Columbia Turnpike N.
Florham Park, NJ 07932
DENISE COTE, District Judge:
This is a federal securities class action brought against
defendants Longfin Corp (“Longfin”), Venkata S. Meenavalli
(“Meenavalli”), Vivek Kumar Ratakonda (“Ratakonda”), Andy
Altahawi (“Altahawi,” and together with Meenavalli, and
Ratakonda, the “Executive Defendants”), Suresh Tammineedi
(“Tammineedi”), Dorababu Penumarthi (“Penumarthi”), (with the
Executive Defendants, “Individual Defendants”), and Network 1
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Financial Securities Inc. (“Network 1,” and together with the
other defendants, “Defendants”) on behalf of investors who
purchased Longfin’s stock.
This Opinion addresses the motions to dismiss filed by
Tammineedi, Penumarthi and Network 1. Tammineedi and Penumarthi
have moved to dismiss for lack of personal jurisdiction pursuant
to Fed. R. Civ. P. 12(b)(2) and Network 1 has moved to dismiss
for failure to state a claim pursuant to Fed. R. Civ. P.
12(b)(6). For the reasons that follow, Network 1’s motion is
granted in part and Tammineedi and Penumarthi’s motions are
denied.
BACKGROUND
The following facts are taken from the First Amended
Complaint (“FAC”) and documents attached to and incorporated in
it by reference. They are taken in the light most favorable to
the plaintiffs. This Opinion also incorporates by reference and
assumes familiarity with the description of the alleged Longfin
scheme and statutory framework for these claims, as set forth in
a May 1, 2018 Opinion granting a preliminary injunction in a
related SEC enforcement action. See Sec. & Exch. Comm'n v.
Longfin Corp., 316 F. Supp. 3d 743 (S.D.N.Y. 2018).
Longfin describes itself as a finance and technology
corporation that provides foreign exchange and finance
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solutions. It purports to be an American corporation
headquartered in New York. Longfin and its associates are
accused of perpetrating a securities fraud that included false
statements and insider trading.
Tammineedi is a citizen and resident of India. He is the
former director of two entities related to Longfin. Penumarthi
is a citizen and resident of the United Kingdom. He has
described himself as the “head of Longfin’s United Kingdom
operations”. Network 1 is a registered broker-dealer located in
Red Bank, New Jersey.
Longfin’s Regulation A+ Offering
Longfin publicly offered its shares for the first time in
2017 through what is known as a Regulation A+ offering. See
Longfin, 316 F. Supp. 3d 743 (describing Regulation A+
offerings). On June 16, 2017, the SEC first qualified Longfin’s
Regulation A+ offering.
Longfin retained Network 1 as its lead underwriter for its
Regulation A+ offering on August 21, 2017. According to its
underwriting agreement (“Underwriter Agreement”), Network 1 was
to act on a “best efforts basis” to issue and sell Longfin
shares in an initial public offering. In exchange, Longfin
would pay Network 1 a fee, issue it “Underwriter’s Warrants,”
and reimburse it for all expenses. The Underwriter Agreement
provided that investors would purchase Longfin shares through
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broker transactions and that payment for such purchases would be
placed in a segregated bank account.
In the Agreement, Longfin represented that its Offering
Statement and the company’s Amended Final Offering Circular
“present fairly, in all material respects, the financial
condition of the Company.” Longfin also agreed that it would
“use its reasonable best efforts to ensure” that its shares are
listed for trading on the NASDAQ. Network 1 represented that it
would not use or distribute written offering materials other
than the Amended Final Offering Circular, and would make no
representations inconsistent with those made in the Longfin
Offering Statement. Network 1’s obligations under the agreement
were subject to, inter alia, Longfin furnishing certain
certificates to Network 1, including any certificates
“reasonably requested as to the accuracy and completeness” of
statements made by the company in connection with its offering.
Longfin began issuing shares under its Regulation A+
offering on September 1, 2017. As per its underwriting
agreement with Longfin, Network 1 was to receive a percentage of
the gross proceeds from the first 3,000,000 shares sold in the
offering. Network 1 ultimately received $438,757 in commissions
based on 1,140,989 shares sold.
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Longfin’s Listing on NASDAQ
On August 11, 2017, Longfin submitted its application for
listing on NASDAQ. The FAC alleges that Network 1 -- along with
Altahawi, Longfin’s then-Secretary -- were responsible for
communicating with NASDAQ regarding Longfin’s application.
Under NASDAQ Listing Rule 5505(a), a company seeking to
list its equity securities must have, inter alia, at least
1,000,000 publicly-held shares, defined as shares not directly
or indirectly held by an officer, director, or “any person who
is the beneficial owner of more than 10 percent of the total
shares outstanding.” On November 15, NASDAQ approved Longfin’s
listing.
On November 22, the SEC qualified a November 3 Longfin
Amended Offering Statement. This qualified Longfin to conduct
an offering of up to 10 million Class A shares for $5.00 per
share with a minimum purchase amount of 100 shares. On November
29, Longfin informed NASDAQ that it anticipated listing its
Class A Stock on December 11, 2017.
On December 4, Network 1 requested updated information from
Altahawi on Longfin’s issued shares to use in its communications
with NASDAQ. At Altahawi’s instruction, Longfin’s transfer
agent provided Network 1 with a list of issuances and a
reconciliation document detailing the deposits and remittances
associated with issuances.
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By December 6, Longfin was still short of NASDAQ’s
requirement that it have issued 1,000,000 publicly-held shares.
One of the fraudulent transactions at the heart of this action
is alleged to have occurred on that day to assist in getting
Longfin listed on the NASDAQ. Longfin issued 409,360 Class A
shares to 24 individuals for $0 in consideration (“December 6
Shares”).
Longfin promptly informed NASDAQ that it would close its
offering on December 7, and list its Class A Stock on December
13. The individuals who received the December 6 Shares include
Longfin insiders such as Tammineedi and Penumarthi and officers
such as Ratakonda. Tammineedi received 30,000 shares and
Penumarthi received 40,000 shares. Later, through trading on
the open market, Tammineedi sold 2,200 of his December 6 Shares
for $127,335, and Penumarthi sold 39,800 of his December 6
Shares for $1,531,187.39.
On December 7, Altahawi sent Network 1 an updated list of
shareholders that included the 24 individuals who had received
December 6 Shares and informed Network 1 that Longfin wished to
close the Regulation A+ Offering that day. In response, Network
1 requested “the list of people that invested” and “proof of
Funds received.” Altahawi provided Network 1 with a list of the
24 individuals who received December 6 Shares and bank
statements purportedly containing payment information for these
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shares. Plaintiffs allege that the December 6 Shares were never
paid for and the bank statements did not actually contain proof
of funds received.
On December 11, Altahawi informed NASDAQ that Longfin had
sold 1,140,989 Class A shares under its Regulation A+ Offering
to 364 shareholders. Beginning on December 13, Longfin’s Class
A Shares were listed on NASDAQ under the ticker symbol “LFIN.”
On December 13 and 14, Tammineedi purchased 67,000 additional
shares of Longfin Class A Stock. Tammineedi later sold these
shares for a profit of $2.7 million.
Around December 21, in response to requests by Tammineedi,
Penumarthi, and five additional December 6 shareholders to open
brokerage accounts, Network 1 asked Altahawi to confirm that
these shareholders had paid for their shares. Altahawi again
provided Network 1 with bank statements that purportedly showed
payment for the stocks. Plaintiffs allege that the two escrow
accounts used in connection with Longfin’s Regulation A+
offering and Longfin’s bank account do not actually contain
evidence of payments made for the December 6 Shares.
Longfin’s Press Releases and SEC Investigation
Between December 13 and March 22, 2018, Longfin issued a
series of false and misleading press releases announcing its
acquisition of a “[b]lockchain technology empowered solutions
provider” named Ziddu.com, a multi-billion dollar investment in
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the company, and the company’s listing on performance indexes.
In response, the price of Longfin’s Class A stock skyrocketed.
Between March 26 and April 3, 2018, Longfin’s stock price
fell precipitously following disclosure of, inter alia, the SEC
investigation. On April 6, the SEC announced it had acquired a
court order freezing $27 million in trading proceeds from
allegedly illegal sales of Longfin Class A stock. That same
day, NASDAQ announced that it was halting the trading of
Longfin’s Class A Stock. On May 24, Longfin stock was
officially delisted from NASDAQ and began trading on the over-
the-counter market.
Plaintiffs allege that Tammineedi and Penumarthi sold their
Longfin shares while in possession of material non-public
information and neglected their duty to disclose such
information or abstain from trading. They allege as well that
Tammineedi breached his duty as an executive employee of Longfin
to refrain from trading Longfin stock.
Procedural History
Plaintiffs filed this action on April 3, 2018 on behalf of
a class consisting of all persons and entities, other than the
defendants and their affiliates, who purchased Longfin’s Class A
common stock between December 13, 2017 and April 6, 2018. The
plaintiffs filed the FAC on July 27.
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The FAC asserts five causes of action: (1) that all
Defendants are liable under Section 12(a)(1) of the Securities
Act of 1933 (the “Securities Act”), 15 U.S.C. § 77l(a)(1), for
selling unregistered securities in violation of Section 5 of the
Securities Act, 15 U.S.C. § 77e(a); (2) that the Executive
Defendants are liable for the Section 12(a)(1) violation as
control persons under Section 15(a) of the Securities Act, 15
U.S.C. § 77o; (3) that all Defendants committed fraud in
violation of Section 10(b) of the Securities Exchange Act of
1934 (the “Exchange Act”), 15 U.S.C. § 78j(b), and Rule 10b-5
promulgated thereunder, 17 C.F.R. § 240.10b-5; (4) that the
Individual Defendants are liable for the Section 10(b) violation
as control persons under Section 20(a) of the Exchange Act, 15
U.S.C. § 78t(a); and (5) that Altahawi, Tammineedi, and
Penumarthi engaged in insider trading in violation of Section
20A of the Exchange Act, 15 U.S.C. § 78t-1(a).
Network 1 filed a motion to dismiss the FAC pursuant to
Fed. R. Civ. P. 12(b)(6) and the Private Securities Litigation
Reform Act (“PSLRA”) on September 25, 2018. Penumarthi and
Tammineedi filed motions to dismiss the FAC pursuant to Fed. R.
Civ. P. 12(b)(2) on October 11 and October 18, respectively.1
1 On January 4, 2019, a default was entered against Longfin. On January 22, a default was entered against Meenavalli and
Ratakonda.
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The SEC brought a related securities action on April 4,
2018, alleging that defendants Longfin, Meenavalli, Altahawi,
Penumarthi, and Tammineedi violated Section 5 of the Securities
Act by selling securities of Longfin in violation of the
registration requirements of the Securities Act. A Temporary
Restraining Order (“TRO”) was issued on April 4, which froze
certain accounts associated with Altahawi, Tammineedi,
Penumarthi, Longfin, and Meenavalli. On April 23, the TRO was
vacated with respect to Longfin and Meenavalli. On May 1, 2018,
this Court granted the SEC’s motion for a preliminary
injunction, in effect extending the TRO as to Altahawi,
Tammineedi, and Penumarthi. Longfin, 316 F. Supp. 3d at 755.
The May Opinion found, inter alia, that the SEC was likely to
succeed in showing that Tammineedi and Penumarthi sold
unregistered shares of Longfin stock in violation of Section 5
of the Securities Act when they sold shares they acquired on
December 6, 2017. Id. at 769.
Discussion
Network 1’s Motion to Dismiss
Network 1 has moved to dismiss the FAC under Fed R. Civ. P.
12(b)(6) and the PSLRA. “To survive a motion to dismiss, a
complaint must contain sufficient factual matter, accepted as
true, to state a claim to relief that is plausible on its face.”
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Sierra Club v. Con-Strux, LLC, 911 F.3d 85, 88 (2d Cir. 2018)
(citation omitted). A claim to relief is plausible when the
factual allegations in a complaint “allow[] the court to draw
the reasonable inference that the defendant is liable for the
misconduct alleged.” Progressive Credit Union v. City of New
York, 889 F.3d 40, 48 (2d Cir. 2018) (citation omitted).
“[T]hreadbare recitals of the elements of a cause of action,
supported by mere conclusory statements, do not suffice.”
Carlin v. Davidson Fink LLP, 852 F.3d 207, 212 (2d Cir. 2017).
The plaintiff must plead enough facts to “nudge[] [his] claims
across the line from conceivable to plausible . . . .” Bell
Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007).
When a party moves to dismiss for failure to state a claim
upon which relief can be granted under Rule 12(b)(6), Fed. R.
Civ. P., a court must “constru[e] the complaint liberally,
accept[] all factual allegations as true, and draw[] all
reasonable inferences in the plaintiff’s favor.” Coalition for
Competitive Electricity, Dynergy Inc. v. Zibelman, 906 F.3d 41,
48-49 (2d Cir. 2018) (citation omitted). “A complaint is deemed
to include any written instrument attached to it as an exhibit
or any statements or documents incorporated in it by reference.”
Nicosia v. Amazon.com, Inc., 834 F.3d 220, 230 (2d Cir. 2016)
(citation omitted). A court may also consider documents that
are “integral to the complaint.” Goel v. Bunge, Ltd., 820 F.3d
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554, 559 (2d Cir. 2016). “A document is integral to the
complaint where the complaint relies heavily upon its terms and
effect.” Id. A court may consider “documents that the
plaintiffs either possessed or knew about and upon which they
relied in bringing the suit . . . .” Rothman v. Gregor, 220
F.3d 81, 88 (2d Cir. 2000). A court may also take judicial
notice of “relevant matters of public record.” Giraldo v.
Kessler, 694 F.3d 161, 164 (2d Cir. 2012).
Claims that sound in fraud must be plead with particularity
pursuant to Fed. R. Civ. P. 9(b). U.S. ex rel. Polansky v.
Pfizer, Inc., 822 F.3d 613, 617-18 (2d Cir. 2016). “To satisfy
this Rule, a complaint alleging fraud must (1) specify the
statements that the plaintiff contends were fraudulent, (2)
identify the speaker, (3) state where and when the statements
were made, and (4) explain why the statements were fraudulent.”
United States ex rel. Ladas v. Exelis, Inc., 824 F.3d 16, 25 (2d
Cir. 2016) (citation omitted).
Where a party moves to dismiss securities fraud
allegations,
section 21D(b)(2) of the PSLRA, which governs scienter
pleading in securities fraud actions, establishes a
more stringent rule for inferences involving scienter,
and requires that a plaintiff's complaint state with
particularity facts giving rise to a strong inference
that the defendant acted with the required state of
mind.
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Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital
Inc., 531 F.3d 190, 194 (2d Cir. 2008) (citation omitted). An
inference of scienter is “strong” and a complaint will survive
if “a reasonable person would deem the inference of scienter
cogent and at least as compelling as any opposing inference one
could draw from the facts alleged.” Tellabs, Inc. v. Makor
Issues & Rights, Ltd., 551 U.S. 308, 324 (2007).
“The requisite state of mind in a section 10(b) [of the
Exchange Act] and Rule 10b–5 action is an intent to deceive,
manipulate, or defraud,” or, in the alternative, recklessness.
ECA, Local 134 IBEW Joint Pension Tr. of Chicago v. JP Morgan
Chase Co., 553 F.3d 187, 198 (2d Cir. 2009) (citation omitted).
Section 10(b) claims therefore sound in fraud, and must satisfy
the pleading requirements of Rule 9(b) and the PSLRA by “stating
with particularity the circumstances constituting fraud.” Id.
at 196. To state a claim under Section 12(a)(1) of the
Securities Act, a plaintiff need not plead scienter, reliance,
or fraud. Rombach v. Chang, 355 F.3d 164, 169 n.4 (2d Cir.
2004). But the Second Circuit has determined that the wording
of Federal Rule of Civil Procedure 9(b) “is cast in terms of the
conduct alleged, and is not limited to allegations styled or
denominated as fraud or expressed in terms of the constituent
elements of a fraud cause of action.” Id. at 171. Therefore,
“the heightened pleading standard of Rule 9(b) applies to . . .
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Section 12[] claims insofar as the claims are premised on
allegations of fraud.” Id.
I. Section 12(a)(1) Claim
The plaintiffs bring two counts against Network 1, the
first under Section 12(a)(1) of the Securities Act. The
plaintiffs claim that Network 1 and all other Defendants
violated Section 12(a)(1) by offering or selling a security in
violation of Section 5 of the Securities Act. The parties agree
that claims under Section 12(a)(1) are not governed by the
heightened PSLRA pleading standard for claims of securities
fraud.
Section 12(a)(1) provides in relevant part that
Any person who--
(1) offers or sells a security in violation of section
77e of this title, . . .
shall be liable, subject to subsection (b), to the
person purchasing such security from him, who may sue
either at law or in equity in any court of competent
jurisdiction, to recover the consideration paid for
such security with interest thereon, less the amount
of any income received thereon, upon the tender of
such security, or for damages if he no longer owns the
security.
15 U.S.C. § 77l(a)(1) (emphasis supplied). Section 77e
prohibits the sale of unregistered securities. 15 U.S.C.
§77e(a). Regulation A+ was promulgated to create an exemption
from the registration requirements for certain categories of
offerings. See Longfin, 316 F. Supp. 3d at 748.
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Network 1 argues that the plaintiffs’ Section 12(a)(1)
allegations against it should be dismissed because Network 1 did
not act as a “seller” of securities to the plaintiffs, who
purchased their securities on the NASDAQ. It is correct.
The Supreme Court has held that a plaintiff may assert
claims against a party under Section 12 of the Securities Act,
even in the absence of contractual privity, so long as it is
shown that the defendant “successfully solicit[ed] the purchase,
motivated at least in part by a desire to serve his own
financial interests or those of the securities owner.” Pinter
v. Dahl, 486 U.S. 622, 647 (1988). The adoption of this rule,
which has come to be known as the “statutory seller” standard,
see Fed. Hous. Fin. Agency v. UBS Americas, Inc., 858 F. Supp.
2d 306, 333 (S.D.N.Y. 2012), aff'd, 712 F.3d 136 (2d Cir. 2013),
was driven in large part by the precise wording of Section 12,
which provides, as relevant here: “Any person who . . . offers
or sells a security . . . shall be liable . . . to the person
purchasing such security from him. . . .” 15 U.S.C. §
77l(a)(2).
The Court in Pinter noted in particular that the Securities
Act defines the terms “offer to sell,” “offer for sale,” or
“offer” to include “every attempt or offer to dispose of, or
solicitation of an offer to buy, a security or interest in a
security, for value.” Pinter, 486 U.S. at 643 (citing 15 U.S.C.
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§ 77b(b)(3)). From this, it concluded that “[t]he inclusion of
the phrase ‘solicitation of an offer to buy’ within the
definition of ‘offer’ brings an individual who engages in
solicitation, an activity not inherently confined to the actual
owner, within the scope of § 12.” Id. “[W]hen a broker acting
as agent of one of the principals to the transaction
successfully solicits a purchase, he is a person from whom the
buyer purchases within the meaning of § 12 and is therefore
liable as a statutory seller.” Id. at 646. The Court
explained:
[B]rokers and other solicitors are well positioned to
control the flow of information to a potential
purchaser, and, in fact, such persons are the
participants in the selling transaction who most often
disseminate material information to investors. Thus,
solicitation is the stage at which an investor is most
likely to be injured, that is, by being persuaded to
purchase securities without full and fair information.
Id. at 646–47.
The Court in Pinter, however, declined to extend the
definition of seller under Section 12(a)(1) to include
“participants' collateral to the offer or sale.” Id. at 650.
Under Section 12(a)(1) the “buyer does not, in any meaningful
sense, ‘purchas[e]’ the security from . . . participants only
remotely related to the relevant aspects of the sales
transactions” such as those whose “involvement is only the
performance of their professional services.” Id. at 651.
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Underwriters may, in certain circumstances, be liable as
sellers under Section 12.
In a firm commitment underwriting, the underwriter
agrees to purchase an agreed upon percentage of the
offering irrespective of whether the securities can be
sold in the public market; therefore, the underwriter
bears the risk if the offering is undersubscribed . .
. [and] is thus the owner of any unsold shares and can
be liable as a ‘seller’ for direct sales to the public
for purposes of Section 12. In re WorldCom, Inc. Sec. Litig.,
294 F. Supp. 2d 392, 409 (S.D.N.Y. 2003).
The FAC asserts that Network 1 acted as lead underwiter for
its Regulation A+ Offering and was instrumental in getting
Longfin shares listed on the NASDAQ. This is insufficient to
state a Section 12(a)(1) violation for sales of Longfin shares
to the class over the NASDAQ.
The plaintiffs urge that but for Network 1’s actions, the
Longfin stock “would not have been listed” on the NASDAQ.
Again, this is insufficient to deem Network 1 a “seller” of
Longfin shares purchased on the NASDAQ.2 There is no allegation
that Network 1 acted as a broker for the plaintiff’s’ purchases,
owned the shares sold to the plaintiffs, or solicited those
purchases. Network 1’s assistance in the initial public
2 Network 1 argues that the plaintiffs’ Section 12(a)(1) allegations are grounded in fraud, and so must be pled with Rule
9(b) particularity. Because the FAC fails to allege that
Network 1 was a “seller” for purposes of Section 12(a)(1), it is
unnecessary to reach this issue.
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offering and in the NASDAQ listing process did not make it a
seller of Longfin shares on the open market.
II. Violation of Section 10(b) of the Exchange Act and Rule
10b-5.
The plaintiffs claim that Network 1 violated Section 10(b)
of the Exchange Act and Rule 10b-5 through its participation in
Longfin’s allegedly fraudulent and manipulative scheme. Section
10(b) makes it unlawful to “use or employ . . . any manipulative
or deceptive device or contrivance” in violation of any
Commission rules and regulations. 15 U.S.C. § 78j(b). Rule
10b-5, promulgated under Section 10(b), contains three
subsections:
subsection (a) of the Rule makes it unlawful to employ
any device, scheme, or artifice to defraud.
Subsection (b) makes it unlawful to make any untrue
statement of a material fact. And subsection (c)
makes it unlawful to engage in any act, practice, or
course of business that operates as a fraud or deceit.
Lorenzo v. Sec. & Exch. Comm'n, No. 17-1077, 2019 WL 1369839, at
*4 (U.S. Mar. 27, 2019)(citation omitted). “To prevail on a
claim of market manipulation under § 10(b) and Rule 10b–5, the
[plaintiff] must demonstrate that the defendant engaged in
manipulative acts with scienter in connection with the purchase
or sale of securities on any facility of a national securities
exchange.” Sec. & Exch. Comm'n v. Lek Sec. Corp., 276 F. Supp.
3d 49, 59 (S.D.N.Y. 2017)
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In a typical § 10(b) private action a plaintiff must
prove (1) a material misrepresentation or omission by
the defendant; (2) scienter; (3) a connection between
the misrepresentation or omission and the purchase or
sale of a security; (4) reliance upon the
misrepresentation or omission; (5) economic loss; and
(6) loss causation.
Stoneridge Inv. Partners, LLC v. Sci.-Atlanta, 552 U.S. 148, 157
(2008). But, “[c]onduct itself can be deceptive, and so
liability under § 10(b) or Rule 10b–5 does not require a
specific oral or written statement.” United States v. Finnerty,
533 F.3d 143, 148 (2d Cir. 2008) (citation omitted).
In determining whether an act is manipulative, the Second
Circuit requires “a showing that an alleged manipulator engaged
in market activity aimed at deceiving investors as to how other
market participants have valued a security.” Wilson v. Merrill
Lynch & Co., Inc., 671 F.3d 120, 130 (2d Cir. 2011) (citation
omitted). “The gravamen of manipulation is deception of
investors into believing that prices at which they purchase and
sell securities are determined by the natural interplay of
supply and demand, not rigged by manipulators.” Id. (citation
omitted). See also Lorenzo, 2019 WL 1369839, at *4; Janus
Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135,
142 (2011).
Liability under Section 10(b) and Rule 10b–5 also requires
proof of scienter, which the Supreme Court has defined as an
“intent to deceive, manipulate or defraud” or “knowing or
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intentional misconduct.” Ernst & Ernst v. Hochfelder, 425 U.S.
185, 194 n.12 (1976); see Grandon v. Merrill Lynch & Co., 147
F.3d 184, 194 (2d Cir. 1998). The Second Circuit has held that
reckless conduct -- i.e. “conduct which is highly unreasonable
and which represents an extreme departure from the standards of
ordinary care” -- satisfies the scienter requirement. SEC v.
Obus, 693 F.3d 276, 286 (2d Cir. 2012) (citation omitted). Mere
negligence, however, is insufficient. Id. “Proof of scienter
need not be direct, but may be a matter of inference from
circumstantial evidence.” Wechsler v. Steinberg, 733 F.2d 1054,
1058 (2d Cir. 1984) (citation omitted).
Network 1 moves to dismiss the Exchange Act claim for the
FAC’s failure to allege that it made any false statement.
Network 1 may be liable regardless of whether it “made” any
misrepresentations or omissions. See Lorenzo, 2019 WL 1369839,
at *4. The FAC alleges that Network 1 facilitated Longfin’s
Regulation A+ Offering and listing on NASDAQ despite knowing
that the Longfin shares were issued outside the ambit of
Regulation A+’s requirements. Such allegations are adequate to
state a claim that Network 1 participated in a scheme cognizable
under Rule 10b-5.
The overarching scheme alleged in the FAC required the
Longfin shares to be listed on NASDAQ. Only after that listing
had been achieved did the conspirators manipulate the market
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price through dissemination of false information and make their
profits by selling Longfin shares at the artificially inflated
prices. If Network 1 played a significant role in getting
Longfin listed on the NASDAQ when it knew that a significant
number of Longfin shares were not validly issued pursuant to a
Regulation A+ exemption from securities registration
requirements and should not be publicly traded, then it violated
Section 10(b) and Rule 10b-5.
The closer question is whether the plaintiffs have also
adequately plead Network 1’s scienter under the PSLRA’s
heightened pleading requirements. The FAC alleges that Network
1 knew that the December 6 Shares were not validly purchased
pursuant to Regulation A+ but proceeded with the Regulation A+
offering and facilitated the NASDAQ listing in order to gain
financially. The FAC alleges that the bank statements provided
to Network 1 by Altahawi did not prove that the December 6
Shares were purchased for consideration. The FAC also alleges
that the list of December 6 shareholders provided to Network 1
identified individuals, such as Ratakonda, who were executives
at Longfin or closely affiliated with the company or its
employees. The plaintiffs argue that Network 1 should have
understood that the transfer of Longfin shares to such insiders
violated NASDAQ’s listing requirements. These facts give rise
to a strong inference that Network 1 knew that the December 6
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Shares were not validly issued and that the Longfin stock was
ineligible for listing on NASDAQ.
Network 1 argues that it is plausible that Longfin provided
it with falsified bank records. It emphasizes that the FAC
itself acknowledges that Network 1 requested confirmation that
the December 6 Shares had been purchased for consideration.
While Network 1 may be able to show in discovery that Longfin
gave it falsified records, the FAC adequately alleges that the
records provided did not contain proof of payment and that
Network 1 was thus aware of the fraudulent scheme.
Tammineedi and Penumarthi’s Motions to Dismiss
Defendants Tammineedi and Penumarthi have moved to dismiss
the claims against them for lack of personal jurisdiction. “In
order to survive a motion to dismiss for lack of personal
jurisdiction, a plaintiff must make a prima facie showing that
jurisdiction exists.” SPV Osus Ltd. v. UBS AG, 882 F.3d 333,
342 (2d Cir. 2018) (citation omitted). “In evaluating whether
the requisite showing has been made, [a court must] construe the
pleadings and any supporting materials in the light most
favorable to the plaintiff[].” Licci ex rel. Licci v. Lebanese
Canadian Bank, SAL, 732 F.3d 161, 167 (2d Cir. 2013). A
plaintiff may not rely on conclusory statements without any
supporting facts, as such allegations would “lack the factual
specificity necessary to confer jurisdiction.” Jazini v. Nissan
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Motor Co., Ltd., 148 F.3d 181, 185 (2d Cir. 1998).
The federal securities laws at issue in this case provide
for worldwide service of process and permit the exercise of
personal jurisdiction to the limit of the Fifth Amendment's Due
Process Clause. See 15 U.S.C. § 77v3; SEC v. Unifund SAL, 910
F.2d 1028, 1033 (2d Cir. 1990) (holding that “the Securities
Exchange Act permits the exercise of personal jurisdiction to
the limit of the Due Process Clause of the Fifth Amendment”).
The Second Circuit applies a two-step test to determine
whether exercise of personal jurisdiction over a non-resident is
constitutional. First, a court asks whether the defendant has
sufficient “minimum contacts” with the forum, that is, if the
defendant “has purposefully directed [its] activities at the
forum and the litigation arises out of or relates to those
activities.” Gucci America, Inc. v. Weixing Li, 768 F.3d 122,
136 (2d Cir. 2014) (citation omitted). If the court can
establish these minimum contacts, it next determines “whether
the assertion of personal jurisdiction is reasonable under the
circumstances of the particular case.” Porina v. Marward
3 15 U.S.C § 77v provides that “[a]ny such suit or action may be
brought in the district wherein the defendant is found or is an
inhabitant or transacts business, or in the district where the
offer or sale took place, if the defendant participated therein,
and process in such cases may be served in any other district of
which the defendant is an inhabitant or wherever the defendant
may be found.”
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Shipping Co., 521 F.3d 122, 127 (2d Cir. 2008) (citation
omitted).
“In determining whether personal jurisdiction exists over a
foreign defendant who . . . has been served under a federal
service of process provision, a court should consider the
defendant's contacts throughout the United States and not just
those contacts with the forum.” U.S. Titan, Inc. v. Guangzhou
Zhen Hua Shipping Co., 241 F.3d 135, 152 n.12 (2d Cir. 2001).
The Supreme Court has emphasized that “it is the defendant’s
actions, not his expectations, that empower a [forum’s] courts
to subject him to judgment.” J. McIntyre Machinery, Ltd. v.
Nicastro, 564 U.S. 873, 883 (2011). Therefore, “[t]he principal
inquiry” under the Due Process Clause “is whether the
defendant’s activities manifest an intention to submit to the
power of a sovereign.” Id. at 882. In other words, it is
essential in each case that there be some act by which the
defendant “purposefully avails itself of the privilege of
conducting activities” within the United States, thus “invoking
the benefits and protections of its laws.” Id. (quoting Hanson
v. Denckla, 357 U.S. 235, 253 (1958)). Moreover, the resulting
litigation must be derived “from alleged injuries that arise out
of or relate to” that act. Burger King Corp. v. Rudzewicz, 471
U.S. 462, 472-73 (1985) (citation omitted).
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If there are minimum contacts, the defendant must “present
a compelling case that the presence of some other considerations
would render jurisdiction unreasonable.” Eades v. Kennedy, PC
Law Offices, 799 F.3d 161, 169 (2d Cir. 2015) (citation
omitted). Factors in determining whether exercising
jurisdiction is reasonable include:
(1) the burden that the exercise of jurisdiction will
impose on the defendant; (2) the interests of the
forum state in adjudicating the case; (3) the
plaintiff's interest in obtaining convenient and
effective relief; (4) the interstate judicial system's
interest in obtaining the most efficient resolution of
the controversy; and (5) the shared interest of the
states in furthering substantive social policies.
Id. (citation omitted). The ultimate consideration is “fair
play and substantial justice.” Id. (citation omitted).
The allegations against in the FAC provide an adequate
basis for the exercise of personal jurisdiction over Penumarthi
and Tammineedi. They were associated with Longfin or a related
entity and received Longfin shares on December 6 as part of a
market manipulation scheme. They profited handsomely from the
sale of some of these shares over NASDAQ. Their knowing
participation in a securities fraud in the United States
justifies the exercise of jurisdiction over them.
Tammineedi and Penumarthi argue that personal jurisdiction
over them is improper because they do not reside in, do business
in, maintain bank accounts in, or travel regularly to the United
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States. They assert that have never been employed by Longfin
and purchased and/or sold Longfin shares from abroad.4 Even if
true (and some of these assertions are in tension with
allegations in the FAC), these assertions do not suggest that
the exercise of jurisdiction over these foreign defendants in
this action is unreasonable. While both reside far from the
United States, both defendants are already parties to the
related SEC action, which is also before this Court.
Participation in this class action will not add any substantial
burden. The Defendants’ alleged participation in a securities
fraud in connection with an alleged New York issuer and through
trading on a New York-based exchange make the exercise of
jurisdiction reasonable and appropriate.
Conclusion
Network 1’s September 25, 2018 motion to dismiss is granted
as to the Section 12(a)(1) claim and denied as to the Section
4 In his motion to dismiss, Tammineedi states that he used an
account with Western International Securities, Inc. to sell his
shares, but provides no further information about the location
of this company. Penumarthi claims that he “did not use a
United States broker” to buy and sell his Longfin shares.
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10(b) and Rule 10b-5 claim. Penumarthi’s October 11 motion to
dismiss and Tammineedi’s October 18 motion to dismiss are
denied.
Dated: New York, New York
April 11, 2019
____________________________
DENISE COTE
United States District Judge
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